Women Choose Fixed Salaries, Men Performance-Related Pay

Bonn study helps to explain pay differences between the sexes

The fact that on average women earn less than men is not necessarily the result of discrimination: when given a choice between a fixed salary and performance-related pay, women choose the former far more often than men, even if they could earn more by opting for the latter. This is the result of a study carried out by the Institute for the Study of Labor and the University of Bonn.

The researchers had worked out a laboratory experiment involving a total of 119 men and 121 women. They were to multiply pairs of numbers together over a ten-minute period. They were able to choose beforehand how they wanted to be paid. Either they could opt for a fixed sum of seven euros, or they could choose to be paid just under 20 cents for each correct multiplication. Alternatively they could also take part in a kind of tournament, where the opponent was chosen at random. Whoever solved the most tasks won 20 euros, with the opponent getting nothing.

'In our experiment only 44% of all the women taking part chose the performance-related options, although many of them could have earned more if they had,' is how the Bonn economist Professor Armin Falk summarises the results. 'By contrast 68% of the men chose this option.' The results correspond to the statistical data of the socio-economic panel, a survey which the German Institute of Economic Research carries out each year. According to this, 33% of all women work in the public sector, a field in which fixed (though relatively low) pay is the norm. In contrast, only 21% of men are employed in this field.

Professor Falk carries out research at the prestigious Institute for the Study of Labor (the IZA, i.e. Institut zur Zukunft der Arbeit), at the same time working as the head of the University of Bonn's Laboratory for Experimental Economic Research. In the study he and a member of his team, Dr. Thomas Dohmen, wanted to investigate what effect the choice of a pay incentive scheme could have on the composition of the workforce. 'We have also got our participants to do experiments which enable us to draw conclusions about specific traits of their character,' Dr. Dohmen explains. These include, for example, risk affinity, egoism and assessment of one's own abilities. 'Men, for example, are more prepared to take risks,' is how Thomas Dohmen sums up the conclusions. 'Our results show this quite clearly. These findings should at least partly explain why women tend to opt for fixed pay.'

Tournaments attract egoists

Those participants who chose the tournament option could win a relatively large amount of money: they were split up at random into pairs of two. Whoever solved the most tasks within ten minutes received 20 euros. The other player got nothing. Competitive situations like these are not unusual in private enterprise; for instance, promotions can be regarded as such. Fund managers are also frequently paid according to the same principle: the person whose fund was most successful receives a bonus, which may account for a substantial part of the salary.

The Bonn findings indicate that tournaments primarily attract 'egoists': the fact that at least in the experiment winner takes all, with the loser going home empty-handed, apparently led more compassionate participants to opt for a different kind of pay. 'Thetest persons who opted for the tournament variant in our experiment were in addition comparatively keen to take risks,' says Professor Falk. 'They also tended to assess their own abilities too positively.' That is logical: anyone who thinks they are the best can hardly be afraid of competing with an opponent.

The method of payment therefore seems to have a big influence on determining for what type of person a company is attractive. 'If, for example, a bank pays its managers on the competitive principle, it risks attracting above-average financial experts who assess their own abilities too positively,' Professor Falk explains - for the customer this could be a dangerous combination.